Costain has published an update of their work on behalf of the Welsh government for the construction of the A465 Heads of the Valleys road (the "A465 Contract") and the Group's trading for the year ending 31 December 2019 ("FY19").

In the company's half-year results statement in August, they have reported that the Welsh Government had escalated a specific matter under the dispute resolution mechanism in the A465 Contract which we entered into in 2015. That matter, which related to the responsibility for design information, had been decided in Costain's favour in the initial adjudication proceedings.

The specific matter has now been determined at arbitration. The arbitration award effectively splits the responsibility for the design information between both parties. This partially reverses the decision of the initial adjudication and is contrary to the legal advice received by the Group concerning the relevant provisions of the A465 Contract.

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Costain has assessed the implications of this determination and is engaged in discussions with the Welsh Government to reach agreement on a financial settlement. As a result, the Group now expects FY19 underlying operating profit to be in the range of £17 million - £19 million and the year-end net cash position to be c£20 million, with the net cash position being impacted by c£40 million of cash currently withheld on the A465 Contract. We continue to fulfil our obligations under the A465 Contract, with completion scheduled in H1 2021.

Elsewhere in the business, Costain has performed in line with expectations in the second half of the year. They said that they are "making good progress" with their 'Leading Edge' strategy securing an increasing number of higher margin contracts from across our blue-chip client base. The Group has secured c£600 million of new work during the second half, including contract awards and extensions to existing contracts.

The Group expects to finish the year with an order book of £4.2 billion (31 December 2018: £4.2 billion). As previously advised, HS2 represents an important contract for the Group and our order book includes £1.1 billion in respect of it. We continue to undertake contracted work for the client and await the outcome of the independent review commissioned by the Government.

Alex Vaughan, Chief Executive Officer, said: "Clearly the situation regarding the A465 contract is disappointing. Elsewhere, the business is performing in line with expectations. We have secured a number of new contracts to maintain our healthy order book. We have also made good progress with our Leading Edge strategy, accelerating the deployment of higher margin services to our blue chip client base. We are confident this strategy will enhance our offer to clients, deliver higher margins and generate long term shareholder value."

(MH/JG)